Tuesday, April 18, 2017

Cannabis, Liquor, and More: What’s It Like to Run a Highly Regulated Small Business?

Every business has regulations it must follow. But when it comes to businesses involved in cannabis, liquor, or sex, the regulations are piled so high it can be hard to see over the stacks of papers.

Want to open a bar? Be ready for your ice machine to haunt your dreams whenever you’re worried the health department might stroll through. Want to open a marijuana dispensary or start an adult entertainment website? Good luck finding a bank that will work with you.

Of course, there’s no shortage of any of these types business, so it can be done profitably—but expect to spend a large portion of your time complying with all the extra headaches and hurdles. We talked to business owners who have had to adjust to the extra time and complexity that added regulations bring to their companies.

Cannabis: An Emerging Industry with Many Regulatory Roadblocks

Chris Driessen is president ofOrgana Brands, a cannabis oil manufacturing and distribution company in Denver, Colorado. He says that when he entered the industry, he was surprised by the amount of regulation.

“It was certainly daunting at first,” he says, “but since we were so attuned to the fact that we were doing something federally illegal, we didn’t take any chances. Most people think that the cannabis industry is full of people with shady pasts or hippies with a dream. Nothing could be further from the truth.”

It’s hard enough to comply with one state’s rules regarding cannabis, but Organa Brands has extraction labs in 10 states, creating a complicated mix of federal and state regulations. Driessen says he can spend up to a fifth of his working hours on regulations, depending on the state.

Also at the state level, Driessen says that testing requirements “seemingly change by the minute. Everything from potency testing to heavy metals or residuals solvents in our concentrates are scrutinized.” But the real problem, he adds, isn’t the testing—people have a right to know what goes in their body. It’s that there are no unified standards.

Of all the regulations the cannabis industry faces, though, he says the one he’d most like to see disappear isSection 280eof the federal tax code that results in “extraordinarily high tax liabilities and artificially low profit margins.”

Adam Weiss and Spencer Uniss, who describe themselves as self-taught marijuana “cannaseurs,” foundedBolder Cannabis and Extractsand own and operate two cultivation facilities, an extraction facility, and a retail store. They estimate that half of the time they spend on their Boulder, Colorado, business goes toward regulations.

“This business is compliance,” Weiss says. “It is our top priority and primary focus every day. The most difficult aspect is keeping up with the constantly changing regulations from multiple regulatory agencies.”

One of the biggest hurdles they’ve had to overcome was having to operate as an all-cash business. Until recently, they didn’t have banking access, couldn’t deposit the cash they earned, or write checks to pay bills. They also couldn’t get loans.

But in August 2013, the U.S. Attorney’s Office issued the “Cole Memo,” which served as a green light for the cannabis industry despite federal law. Because of the memo, Weiss says, about 300 banks nationwide started providing services to the cannabis industry by 2016. While this development has been hugely beneficial to the industry, “the downside is that the relatively small number of banks that have chosen to do business with the industry charge a premium to do so,” Weiss says. “We pay significantly higher bank fees than companies in other industries—a ‘high-risk premium.'”

The benefits of that memo might be in jeopardy, though. U.S. Attorney General Jeff Sessions, who was confirmed as a member of the Trump administration February, hasdifferent ideas aboutthe legality of marijuana than the previous administration.

Still, Weiss and Driessen both feel optimistic about the cannabis industry’s future.

“We have the opportunity to lead the world in the largest economic opportunity since the cell phone,” Driessen says.

Liquor: An Older Business Facing Complexities State to State

The most obvious—and one of the most important regulations—a bar owner must comply with is making sure every customer is of legal age. IDs must be checked. That’s easy enough. But ask a bar owner, especially one who also serves food, about their most difficult regulations, and they will have a lot to say about their local health department—even though most understand the need for it.

“I, like everyone else in New York City, would like to eat and drink in clean and well-run establishments,” says David Moo, owner of Quarter Bar, which was named one of the best bars in America byEsquire.

Because Moo had a couple of decades of experience in the industry before he opened Quarter Bar, he had a pretty good idea of what he was getting into. Almost everything he does is touched by a health or liquor regulation.

“They take up an enormous amount of my time,” he says. “It becomes problematic in that the rules are certainly long and largely arcane, and therefore, it’s impossible for any one health inspector to look into every aspect of the code because it’s seriously like the size of ‘War and Peace.'”

He says the regulations include refrigerator temperatures, cleanliness, mold, equipment placement, storage, and safety. But one thing most bar owners lose a lot of sleep over in particular is their ice machine. Moo says that’s “something almost everyone is in violation of. Ice machines cause serious problems, and it’s a massive violation.”

Because of the impossibility of meeting—or even knowing—all the regulations, Moo says, inspectors tend to choose different things that they’re interested in, “and then it seems to the operator that the enforcement of the New York City health code is totally capricious.”

For the makers of liquor, the rules are a little clearer. Colin Spoelman, the co-founder and master distiller ofKings County Distillery in New York City, says the most onerous regulations arise when you’re setting up as a distillery. It’s not as burdensome once the business starts operating.

“There are federal rules you have to comply with that are related to keeping inventory and filing tax forms—and the locks have to be a certain thickness and heft,” he says. “For the most part, once you’ve established your distillery, it’s more about tracking your product through the system. As long as you’re not trying to cheat the government, it’s pretty straightforward.”

But with the ambition to sell nationally, Spoelman will have to learn and adhere to different rules in every state.

“In the ice cream business or with software, you can launch pretty much everywhere in the world simultaneously,” he says. “But in liquor, you have to find a distributor in each state. That’s because, since Prohibition, they divided manufacturers, distributors, bars and restaurants, and retailers—and that varies from state to state. The distributor in Illinois might have a different agenda than I do. That’s our biggest complication—finding a match in the middle. We have to partner with 50 different businesses.”

Adult Entertainment: Creativity Is a Requirement

Cindy Gallop launchedMake Love Not Pornin August 2012 to address issues she saw in technology’s effect on human sexual behavior. She says MLNP is “pro-sex, pro-porn, pro-knowing the difference” with the goal of making it easier for people to talk about sex in the public domain. She also says she would not classify her site as “porn” but rather a new category: “social sex.” The site’s videos aim to capture real moments of intimacy, and the people in them are not performers.

The venture, she says, was “a complete and total accident that I never intentionally set out to do. It comes out of direct personal experience. About 10 years ago, through dating younger men, I was encountering an issue that happens when two things converge—when today’s total freedom of access met our society’s reluctance to talk openly and honestly about sex.”

“If we can get politicians’ support on the regulatory front,” she says, “we can open up this industry and make a huge amount of money.”

But Gallop, who worked as an advertising executive for more than two decades, didn’t know the full extent of how difficult this space would be.

“One thing I didn’t realize is that my tiny team and I would fight a colossal battle to build it,” she says. “Essentially, for every piece of infrastructure, all the fine print says, ‘No adult content.’ I can’t get funded. I can’t get backed.”

It took four years to find a bank that would let her open an account. Payment processing is a huge obstacle. PayPal won’t work with them. Neither will streaming services like Amazon, which means they’ve had to build their entire platform as proprietary property.

But her biggest obstacle is what she calls “the fear of what other people will think.” She says that when she talks to people about what she’s doing, many of them offer their support but say they can’t help her publicly because of the way it might look if they invested in this type of business.

“I realized early on that I’d have to pave my own way,” she says. “When you have a world-changing startup, you have to change the world to fit it—not the other way around.”